Q4 2019 Earnings Call
Good morning, and welcome to TPG specialty lending Inc.'s fourth quarter and full year ended December 31st 2019 earnings Conference call.
Before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward looking statements.
Statements. Other just statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and evolve a number of risk and uncertainties.
Actual results may differ materially from those in the forward looking statements as of a sort of a number of factors.
Including those described from time to time and TPG specialty lending Incs filings with the Securities Exchange Commission.
The company assumes no obligation to update any such forward looking statements.
Yesterday after market close the company issued its earnings press release for the fourth quarter and for your ended December 31st 2019, and posted a presentation today Investor resources section of its website.
Www dot TPG specialty lending dotcom.
The presentation should be reviewed in conjunction with the company's form 10-K filed yesterday with the FCC.
TPG specialty lending Inc.'s earnings release is also available on the company's website under the Investor resources section.
Unless noted otherwise all performs figures mentioned in today's prepared remarks are as of in for the fourth quarter and for your December 31st 2019.
As a reminder, dispose being recorded for replay purposes, I will now turn call over to Josh what easterly Chief Executive officer of TPG specialty lending.
Thank you good morning, everyone and thank you for joining US today, let me start up by reviewing our full year and fourth quarter 2019 highlights and then I'll hand, it off to my partner and our President both Stanley to discuss our portfolio activity a metric.
Our CFO instruments will review our financial results in more detail I will conclude with final thoughts before opening the call to Kuni.
After the market close yesterday, we reported fourth quarter net net investment income per share 51 cents and net income per share at 57 cents.
This result, this resulted in full full year net investment income per share of $1.94.
Which corresponds to return of equity up 12% the full year net income per share up to 34, which corresponds to a return on equity a 14% supported by the earnings power of our portfolio, we generated earnings in excess of RMB seven and more in this in a moment.
The difference between this quarters net investment income and net income per share was primarily driven by unrealized gains from both the impact.
Net tightening credit spreads on the valuation of our portfolio and portfolio company specific event.
At year end, our reported net asset value per share, which another high record of 16 83 compared to 16 72 and in the prior quarter, it's exceeding 25 at year end 2018.
Yesterday, our board approved to 5% increase to our quarterly based evident from 39 cents to 41 cents per share the shareholders. It a record as of March 13th payable on April 15th or Board also declared a Q4 supplemental dividends a six cents per share shareholders of record as of February.
28 payable on March 31st.
Finally, our board declared aggregate special cash dividends of 50 cents per share that will be paid to shareholders. During Q2.
Specifically 25 cents per share will be payable on April thirtyth, the shareholders of record as of April 15th and 25 cents per share will be payable on June thirtyth to shareholders of record as of June 15th.
It's been a couple of changes to our dividend policy. This course, let me take a few moments discussed season details starting with increase in our based isn't it.
Said many times in the past we view our based evident as an ongoing cash liability and therefore, we said at a level that we believe with a high degree of confidence will be supported by their these powerful portfolio.
This is evidenced by our track record of strong base dividend coverage to net investment income.
Which through the end of 2019 has averaged 127% since March 2014 IPO.
Nearly three years ago in May 2017, we introduce a variable supplemental dividend framework as a way enhance cash distributions for our shareholders is slow the growth of or excise tax.
While preserving the stability over net asset value.
Since that time and given the change of the regulatory framework in the form of lower asset coverage requirement. We believe the fundamental earnings power of our business has increase five slightly offset by the decrease in life LIBOR over the course of 2019.
Taking into account our go forward expectations for balance sheet leverage asset level yields and potential for credit losses, We believe again with a high degree of confidence that our portfolio that will support a higher base dividend.
As for the 50 cents per share special dividends at our board had just declared those who know US no. We've historically said away from paying specials, given our focus on building net asset value and it and our desire to foster a long term shareholder base.
For our philosophy hasn't changed our consistent over universe dividends combined with our expectation of near term capital gains from portfolio rules that realizations will will likely result, and Rick distribution requirement issues that we wanted to proactively address.
While these special dividends or a tax driven decision holding all all else equal we expect that our return on equity will.
Various a flight uplift as a result of capital efficiency gains and the reduction in excise tax on her undistributed income in the slight increase in financial leverage.
Since we Recalibrated, our base that Devon to correspond with their view of earnings power of the portfolio and the intermediate term, we don't expect any Rick distribution requirement issue for the foreseeable future.
For avoidance of doubt.
There will be no changes to the calculation of our quarterly variable supplemental dividends, except to note that the impact of the special different will be excluded from the purposes of the NAV constraint, which ensures that our NAV declines by no more than 15 cents per share over the current and preceding quarter, a pro forma for the impact of the supplemental dividends.
Before passing over to BOE to talk about our portfolio activity I like that quickly highlight the broader market backdrop and its impact on how we think about it business. This past year was characterized by periods of volatility a divergence in sector performance and their corresponding credit spreads and investor preference for high quality paper was driven by mix.
Macro backdrop deteriorating underwriting standards and growing concerns around loan downgrades.
Flight to quality was observed ruble and rising L.C.D. spread delta between first lien and secondly loans between double B and C will be credits.
Rated credits between cyclical non cyclical industries. This trend was particularly notable in the second half of the year. It is the peak in November before moderating at year end, a shared Arnaud last call given the low cyclical exposure in our portfolio the volatility and credit spread movements throughout the year had a relatively muted impact on them.
Valuation over portfolio, where we took into account industry, where do we took into industry specific comps for each of our investments.
Looking ahead, although we may see Boston volatility related to the U.S. presidential election, and the unfolding economic impact of the Corona virus fundamentally we think the near term U.S. economy remains in good shape supported by de escalation trade tensions accommodative mild monetary policy and low inflation. However, we believe backing.
LMIC cycles do exist as such we will continue to focus on things that top of the capital structure limiting our exposure cyclicals and finding strong risk adjusted returns for secondary source of repayments.
As it relates to our financial policy given the competitive late cycle environment. We expect that we will continue to operate below the top end of our target for that target leverage range of 0.9 to 1.25. This allows us to preserve our reinvestment option agree at higher risk adjusted returns next market dislocation.
As a result of our recent efforts on the liability management side, which gene will discuss in detail, we have ample and diverse funding sources with long dated maturities to support our capital needs across market cycles.
With that I'd like to turn the call over the call over to both will walk you through our portfolio activity and metric for more details.
Thanks, Josh the competitive environment for direct lending and 29 team continued to be challenging, but we're starting to see signs of stabilization.
Compared to record 2018 levels capital raised for middle market direct lending and 2019 was down over 35% and private debt dry powder at yearend, although albeit still elevated at nearly $260 billion was down over 10% from the prior year.
Given this ample dry powder and debate credit bifurcation in the broadly syndicated market. The Josh mentioned one of the mean teams over the past few quarters has been the growing market share of direct lenders and large syndicated sponsor financings.
Our decision on whether to pursue a particular opportunistic investment strategy is informed by the risk reward dynamics in that market.
For us we found the in the current environment the best risk adjusted returns continue to transpire from our sector themes.
By partnering with sponsors in companies only in situations, where we have a differentiated view of the business where the sector.
For the ability to provide creative solutions for complex situations weve been able to command better pricing and terms compared to the broadly syndicated markets.
To give you any flavor of our investment activity.
Over 25% of total commitments this year on a dollar basis, we're in retail asset based loans that we underwrite based on liquid collateral values instead of enterprise values, which tend to fluctuate with market cycles.
Our robust deal activity in retail E beam and 2019 is reflective of the the particularly challenging year for brick and mortar retailers, which saw a record high 9300 store closings.
We believe there will be continue there will continue to be disruptions in the traditional retail model and therefore, the ongoing need for capital solutions in the space.
Even our platforms relationships in core expertise in retail as well as illustrated by an average gross unlevered <unk> are up 23% on fully realize retail NPL investments, we expect us to continue to be whenever investment seems for the period ahead.
Outside of retail just under 50% of total commitments in 2019 were sponsored transaction within our specialized sector sub themes, such as business services and Fintech. We believe we heavy competitive advantage and where the underlying businesses have attractive revenue characteristics high quality.
The customer bases and strong returns on invested capital.
Overall, we had a productive Q4 with total commitments of $329 million in total fundings of $289 million across nine new investments and upsizes to four existing investments.
This quarter, we were agent on eight of nine of our new investments, which we believe is valuable and our ability to control the loan structuring and monitoring process.
Compared to the record repayment activity of $383 million in Q4 of last year. This quarter was relatively quiet with $104 million of repayments from one full and six partial investment realizations, resulting in net portfolio growth of $185 million for Q4.
For full year 2019, we generated 1.2 billion of commitments and 1.1 billion of fundings, we had total repayments of $575 million for the year resulted in net portfolio growth of $512 million.
To get a more accurate snapshot of our portfolios growth trend, it's best to look at it over a longer 18 month period, given the strong repayment levels, we experienced in late 2018.
The last 18 months, our portfolio grew by $291 million very modest 10% on an annualized basis.
Looking at the year over year portfolio trends as a portfolio grew in 20 Ninee 2019, we kept our average investment size steady, resulting in an improvement in the diversification of our portfolio.
Our top 10 borrower exposure decreased to 33% of portfolio at fair value down from 39% in the prior year. Similarly, our portfolio cyclical exposure, which excludes our asset base loans in retail and our reserve and asset based loans in energy decreased from 4.1% to 2.9% of the portfolio year over year.
On a fair value basis.
At December 31st our top two industry exposure on a fair value basis were business services, 16.8% in retail and consumer products consistent predominantly of retail asset based loans at 14.9%.
From a credit statistics standpoint, we continue to improve the interest coverage and net leverage profile of our portfolio.
At year end across our core portfolio companies. Our average net attachment point was 0.2 X. and our average last dollar leverage was 4.2 x. compared to zero point, Fourx and four point Fourx a year ago.
And the average interest coverage ratio for our core portfolio companies improve from 2.8 acts to 3.2 next year over year.
We had no investments on nonaccrual status at year end and then the overall performance of our portfolio remained steady at 1.15 on our assessment scale of one to five with one being the highest compared to 1.14 in Q4 of last year.
We continue to have limited junior capital exposure with 96% first lien exposure at year end.
On the underwriting side, we source, 99% of our portfolio through non intermediary channels.
This has supported our ability to structure effective group voting control on 80% of our debt investments and an average two financial covenants per credit agreement.
It has also supported our ability to structure call protection across our debt portfolio, which provides fee income appears of high portfolio turnover to support our lease.
As for portfolio year yields at year end.
The weighted average total yield on our debt and income producing securities at amortized cost was 10.7% compared to 10.8% in the prior quarter.
Breaking down the drivers of this yield movement, there was 30 basis points of downward impact from the decrease in the effective fly bore across our debt investments, which was partially offset by 20 basis points uplift from the yield impact of new versus exited investments.
The yield at amortized costs on new investments this quarter was 12.3% compared to 12.0% on exited debt investments with that I'd like to turn it over to Ian.
Thanks.
As Josh in both mentioned this quarter was strong from both an earnings and originations perspective.
In Q4, we generated net investment income per share of 51 cents, which put out 2019 full year net investment income per share at $1.94.
Year end, we had total investments of 2.2 billion total debt outstanding of 1.1 billion and net assets of 1.1 billion or $16 83 per share which is prior to the impact of the six cents per share supplemental dividend that will be paid during Q1.
Given our increased net funding activity this quarter, our average debt to equity ratio moved into our revised target leverage range for the first time, increasing from 0.86 times in the prior quarter 2.97 times.
Our average debt to equity ratio for the full year was 0.84 times consistent with prior year and our leverage at December 31 was onetime.
Following our inaugural index eligible unsecured notes offering in Q4 that we discussed on November earnings call last month, we made further enhancements to our capital structure and liquidity profile by increasing the commitments under our revolving credit facility from 1.2 full 5 billion to 1.315 billion an extent.
During the final maturity by approximately a year to January 2025.
In addition in January we Opportunistically reopened our 2024 nodes, increasing the total principal amount outstanding from 300 million to 350 million.
We were able to execute the reopening at a price above par, which implied a spread to five year treasuries of 195 basis points 50 basis points tighter than the implied spread on our original transaction.
This reopening allowed us to increase our unsecured funding mix with negligible impact on our weighted average cost of debt and therefore, our ROI.
Given our risk management principle of mitigating interest rate risk across our floating rate portfolio, we entered into a fixed to floating interest rate swap on the $50 million of new nodes consistent with the rest of out fixed rate debt.
Pro forma for the revolver amendment and the use of net proceeds from the notes reopening we had $870 million of Undrawn revolver capacity at year end.
We feel very good about our capital position and the significant amount of liquidity, we have to support our reinvestment option and environments, where we can generate outsized are always for our shareholders.
Turning to our presentation materials slide nine is the NPV bridge for the quarter.
Walking through the main drivers of this quarter's end Ivy growth. We added 51 cents per share from net investment income against the base dividend of 39 cents per share.
It was a positive four cents per share impact from credit spread movement on the valuation of our portfolio at a negative three cents per share impact from net unrealized mark to market losses on the interest rate swaps on fixed rate securities given movements in the forward libel code.
Other changes in net realized and unrealized gains primarily driven by portfolio specific events contributed positive seven cents per share impact to this quarter's end Avi.
Moving onto our operating results detailed on slide 11.
Total investment income for the fourth quarter was 66.5 million compared to 17.1 million from the previous quarter.
Breaking down the components of income interest and dividend income was 57.6 million up 1.5 million from the previous quarter. As a result of the increase in the average size of L. debt portfolio.
Other fees, which consist of prepayment fees and accelerated amortization of upfront fees from unscheduled pay downs will lower at 1.8 million compared to 11.2 million in Q3, given quieter prepayment activity this quarter.
Other income was 7.1 million compared to 2.7 million in the prior quarter.
Net expenses, excluding management and incentive fees for the quarter was 16.5 million up from 16.1 million in the prior quarter due to higher interest expense from an increase in the average quarterly debt outstanding.
Our weighted average interest rate on average debt outstanding decreased 24 basis points quarter over quarter, primarily from the decrease in the effective LIBOR across our debt instruments.
Given the one quarter timing lag on the libel reset date on our interest rate swaps on the downward movement in LIBOR. During Q4, we expect the continued tailwind to our weighted average cost of debt in next quarter's results.
Let me take a moment to wrap up on the ROI, we use of our business.
After WRECO repayments at the end of 2018, we steadily rebuilt the portfolio, increasing our financial leverage from 0.59 times to one times, while maintaining a strong return on assets of 12.5%.
With an average debt to equity ratio that was consistent with the prior year at 0.84 times, we generated ROI, we on net investment income of 12% and an arrow, we on net income of 14.5%.
Looking at year over year trends hourly on net investment income decreased from 14% in 2018, mostly resulting from record 2018 repayment levels, which corresponded with elevated activity related fee.
The increase in hourly on net income from 11.6% in the prior year to 14.5% was products, partially driven by an increase in portfolio valuations, resulting from a reversal of the Q4 2018 credit spread widening.
It was also driven by net unrealized gains related to certain portfolio investments and net unrealized gains on interest rate swaps, resulting from changes in the shape of the forward LIBOR curve.
I'd like to quickly flag that per hour adoption of recent hedge accounting guidance, we've applied hedge accounting treatment to out 2024 unsecured notes and the related interest rate swaps as a result changes in the fair value of this particular interest rate swap will be offset by changes in the carrying value of the 2024 notes.
There will be no unrealized gains or losses recognized in our income statement related to this hedging relationship and therefore changes in the fair value of the swap will not impact our ROI on net income going forward.
As we look ahead to full year 2020.
Based on our expectations over the intermediate term for our net asset level yield cost of funds and financial leverage we expect it to target a return on equity of 11% to 12%.
Based on our pro forma year end book value per share of $16 77, which includes the impact of the Q4 supplemental dividends. This corresponds to a range of $1.84 to $2 and one for full year 2020, net investment income per share.
With that I'd like to turn it back to Josh for concluding remarks.
Thank you in our fourth quarter results supported another year of strong are always for our shareholders for the year ahead. Our objective continues to be generating attractive risk adjusted returns for our shareholders for a direct origination strategy, a differentiated human capital expertise across our platform and capital allocation decisions that serve in the.
Yes long term interest of our stakeholders before moving Accuen, a I'd like to address the pending topic regarding our broader TPG sixth Street partners investment platforms relationship with TPG Holdings are six feet business will start in 2009 as its strategic partnership with TPG fixed rate currently manages $33 billion across.
Platform with over 250 people and nine global offices.
Past 10 years or Sixthree business at TPG have each grown and evolved.
Thoughtfully.
And in productive ways. Likewise, so as it relationship with TPG My partners in Iosix, we have been having a series of discussions with TPG about the next step and the evolution of our relationship.
Including the option of operated the independent organizations with TPG continuing to maintain a minority stake in the Sixthree business.
Given sixth street scale sector expertise market presence and the fact that we have already been operating anatomically a potential next phase of the independent organization is going to be business as usual.
For TSR there'd be no changes to the dedicated management personnel of our business.
And our shareholders will continue to benefit from the same sourcing underwriting and operational capabilities of the platform they have experienced.
TSX since inception.
As of today no formal agreement has been finalized and there's no guarantee that one will be reached.
In either case OE business as usual for us.
Those who know US no that are Northstar as always it make decisions are the best interest of our shareholders with that I'd like to thank you you continued interest and for your time today operator, Please open up the line for questions.
Ladies and gentlemen to ask a question you need to press star one of your telephone.
A question press the pound key please standby will be compiled acuity roster.
Our first question comes from Rick Shane with Jpmorgan. Your line is open.
Hey, guys. Thanks for taking my questions. This morning.
Josh partially addressed all my first question in your and your final comments related to.
The separation of six straight from TPG.
But I am curious do you think one of the things that has worked well at Ts Eliot's over the years is.
Good response to incentives do you think your incentives are going to change if you separate from Ts from TPG.
No Hey, Rick Thanks to the question I think we're both on the same time that there was a pretty early in the morning, though.
Hey, fuses and.
And then we'll open the call we think that remain exactly the same all than all the teams economic group based in the industry business and the focus of the team has always been able to create long term value for both the private our private.
LP than our public shareholders.
And we effectively had very limited economics coming from the activities across the firm. So I think we've.
Remaining exactly as Jamie and actually probably a little bit stronger on a go forward basis.
If there if we if we come to conclusion that we're going to operate as independent entities, but.
It is basically business as usual.
And the focus with again is always been you take care of shareholder you take care of your private LP everything else kind of falls in play.
Focus and focus on your mind focus on your customer.
Got it. Thank you for that and then sort of on a more portfolio related question. When we looked at the portfolio on a year over year basis of the top 10 investments today.
For our new investments two of those being able to cells, which typically are shorter.
He had the shorter time on the balance sheet is up that the type of rotation that we should continue to expect on an ongoing basis and the reason I asked that is that as you.
Is the company continues to scale do you expect to do slightly larger transactions and drive higher rotation of that top 10.
Yes.
Very good question.
Let me break it down I think as many in Harbin late cycle focus has always been.
You can manage being the late cycle in our mind kind of four to going away one of the move up the capital structure. The second is being defensive industry, where you have sort of the repayment that are not related economic cycle that third degree more.
Diversity in your portfolio and the fourth is to have run lower balance sheet leverage. So I think the we've we've created a year over year a lot more diversity in our top 10 investment.
And you also see thing they have less correlation to the economic cycle.
And that can be thing to have strong secondary reports of the repayment from.
Asset values that are not related economic cycle.
Or shorter duration investments. So I think I think that will be continued theme for us.
Managing how we think about the way, how we think about being in the late cycle.
I don't know my answer your question I Hope I did.
Yes, you did I mean, I think I would have been some lanes expected greater concentration of new investments in the top 10.
Typically that sort of ratchets up overtime, but I was.
In part curious was.
Not increasing is a function of that sort of late cycle, but as more defensive approach.
That's correct.
Great.
Thats It from me. Thank you guys great. Thank you.
Our next question comes from San O'shea with Wells Fargo. Your line is open.
Hi, Good morning, Thanks for taking my question just.
A couple on portfolio names.
Let's start with a small investment the avid exchange.
Which was.
Recapitalize this quarter, you're in the debt and equity now but can you.
Give context on how this sets.
It into your platform structure, there was a post quarter announcement that you like.
Oh funding rounds I don't know you know that news was in January I don't know if that was the same deal.
But mainly asking in the purpose of.
You know is this a name that sort of migrates to your from the debt platform to the.
Capital solutions strategy.
Yeah, Hey, Pat let me start off Burke with the industry and I'll put a I'll turn it over to both the talk about the investment.
So advocacy we've been around I guess, probably four or five year.
It did.
Clearly in our theme of.
DDB payment.
And payment ecosystem. So it provides the company that has a ecosystem that provide payment across that ecosystem.
Mostly in.
Property management and the property managers.
Dr., both fits squarely in our theme that business has continued to grow significantly.
It has it continues to reinvest and grow at a significant upgrade.
Is that the latest investment we did.
Quite frankly was had a larger we have a larger structure equity investment.
And so we de risk.
We get there was less appropriate to fit inside the that TSR platform in that and Thats a series of transactions where they raise.
Junior equity to our structured equity.
They offer we deemed up out of our original.
Equity investment well I'll turn it over to blow if I Miss anything you touched on everything.
This has been long term relationship and part of the theme that we've been pursuing over the last five years and the emergence of viewed to be a month.
You picked up the announcement of the junior.
Capital raised.
Series up raise of 125 million.
In late December.
In addition to our debt and our crop solution. So thats what was picked up.
Okay. Thanks for the context on that and so some.
A question on Forever 21.
You know being an AB all this a very rich spread you a team and.
No I think as.
As we speak it might have been paid off given the.
Acquisition of the brands.
By Strategics, but can you give us context on.
Was that you know given we don't see an ABS spreads that deep these days.
How much of that was for just the short amount of time you would hold it.
Or for the risk of.
I was going.
Probably a deep stretch second lien maybe I'll for example.
Yes. So good great question and what were 21 I would say at this point 97, 98% result.
[music].
But I'll walk through it so first of all we you can't eat IR and people understand when I say that but look if you hold if you have a 30% IR unusual for a day you really have known ammo OEM to compensate you for risk. The downside. So this is Brad was the compensate for a minimum.
Return given that we were actually allocating capital to the situation.
It was that the dip financing.
And where our thesis was you had asset value in the brand you had two core real estate warehouses in the center valet that we thought we were very very valuable on that we had a real view on and then you had the inventory.
Say it forever 21 of view is pretty well noted in the press had a very very Rocky December we as of December 31st we actually we had kept or more basically consistent with our.
With our.
The cost basis versus what you would have expected you would have expected it to migrate up to the to the effectively the call price or Paul plus the exit fee.
That would obviously that we will get our active fee and we would get over economics.
Retrospect that Mark was very conservative, but it was very difficult December for the company.
But look at our thesis was it was a little bit too big to fill it with one the biggest.
Payers in the mall ecosystem.
I think Calvin centers is 2.5% or 2% to 5% or rent.
As those little bit too big to fail than it had a real brand name.
And then it had rural underlying asset value in the form of inventory and real estate as of yesterday.
With the proceeds we have about $9 million outstanding.
Again, a a real estate properties with basically under contract I think 19 happening but.
So again, it's basic we resolve but it you know.
In December was.
It was we had had that very conservative mark.
And you know it again those that would either a platform of understanding component parts of underlying asset values of these these companies.
Okay got it that's all for me thanks, so much.
Thank you. Our next question comes from Sweden with Ladenburg. Your line is open.
Yes, good morning, everyone.
Josh Thanks for getting up early and battling through your cold.
I wanted to ask a high level question.
To what extent you believe the volatility in the more liquid loan markets may benefit your direct lending platform.
Going forward, given that we're hearing more and more borrowers or migrating away from b cell toward direct lending.
Yeah. So.
Great question, Mickey look I think that.
And then that the there's been some volatility broadly syndicated market that the broadly syndicated markets have been really differentiated by the haven't have not.
That kind of doubling versus core so the correlation we're no longer one.
Across credit Brad.
That does reversed course, a little bit.
[music].
And there the correlation there getting tighter my deep overall concern is is that for the industry.
Is that given where the industry sits on the cost curve.
We will get there our base management fees in our incentive fee.
That we better be a little careful.
There will be a lot careful of BT pure substitute that broadly syndicated market where people can access the broadly syndicated market. As you know at 50 basis 25 to 50 basis points through a vote and fund or CLL structure and effectively creating the same risk return and.
Because we did so much higher and the cost curve. This has actually been a theme for me Mickey that you and I have discussed probably now were five or six year, which was my problem with T. IP fee.
Which was they'd be could be brought broadly syndicated loan.
And brought other people's yellow equity and didn't match manufacture their own and though where they sound like Hospira. There were basically taken dollar and disjointed dollar a providing something we left in the dollar value their shareholders given where they found the cost of so my hope is that if the industry will.
The volatility as as a way to create.
Hi solution and certainty and get paid for that providing that certainty to issue or.
If the industry the effective we substituting and providing this theme risk reward at higher on the cost curve the industry is going to be trouble.
I understand and I. Thank you for that that color that's really helpful.
Josh you're from is well known for doing deep dives on a sector basis, and obviously with some particular.
Specialties I'm curious to understand what you're thinking in terms of the alternative energy sector. You know, we get everybody talks about oil and gas and how to favor. It is but there was the flip side, obviously as to what's going to place. So are there borrowers in that space that or of the rightsize the right.
Balance sheets and cash flow profiles that are starting to look interesting too to you.
Yes. So good question. So as you guys. You are I think you're exactly right I think there's going to be quite frankly, given the disruption in energy and how much capital than destroyed in.
You mean b.
And quite frankly, the demand probably for traditional carbon products going down there, it's going to be opportunity.
People, who have deep knowledge of were assets in the cost curve with a decline as what the unit economics, which can be opportunity given the lack of capital the industry energy industry will track over time for people who are in excess return.
As it relates to the alternative energy space. The answer we actually have a very we have.
Great teams did in New York.
Focused on all energy and infrastructure project run or energy, they typically fit better in a private fund format because they typically we're typically buying assets or cash flow from asset versus when the corporate bar.
And so we've done a lot stuff and renewables in Spain, and Italy, where the take or pay John take or pay take or pay contract.
So they typically have not fit the.
The typical corporate loan that would that is required under the.
Under the 40 act as we get asked that.
And they typically taken another form which is buying.
Free cash flow through buying app that.
With little or no merger risk that means that we had the expertise and so at the corporate loan Doug pop up you know that will be a great opportunity for us.
But you are in these beginner I think are right I think.
Generally the that energy phases, a little bit of a math.
Started back in 2015, I guess that's continue.
Most boards and then we structure now.
People got the decline goes wrong demand global carbon products are going down.
The equity markets in higher market felt burn.
And then you have the emerging disruptive technologies and Alt energy is I think.
Well, we're over a period of time, who can be unique bought growth.
Take the expertise of our platform and and create value.
That being said, we have you have some commodity price risk and though.
We're going to be very careful we will do that.
Thank you for that and if I could just finished with a couple of sort of housekeeping questions.
Just to gauge risk in the portfolio can can you give us a sense of what the portfolios.
Average debt to EBITDA ratio is.
I think both cover in the prepared remarks, I think it's got has gone down year over year. So our last on average are last dollar attachment point is 4.2 time that compared to that on average last year 4.5 time on interest coverage basis.
I think we also got better that's effectively.
And I'm, giving exact numbers, it's I think it was three point.
Two.
This year compared to 2.8 last year I mean in some of that quite frankly is earnings grew a mix between earnings growth and continue to be having a comment is that.
Okay, and lastly, maybe for Ian just at a high level, even on the portfolio company basis, what were the main drivers of the realized loss and the unrealized gains this quarter.
On the unrealized.
With me.
There's no major driver is the one of described as cats and dogs, but there's probably about 12 names that contribute to that overall, but nothing specific extends out there.
We will realize.
Gain on a liquid name the rehab.
It's less than half a penny.
Theres really nothing major to highlight yes, I mean look I'd be curriculum, which I think it publicly announced that got refinancing Q1.
The Mark we're basically after the call price.
That was two then.
But there was nothing that contributed more than two then.
On a single basis.
And that's also the case with the realized loss.
Yes, okay.
Okay. That's great. That's all for me. This morning I. Appreciate your time, thank you very much.
Great. Thanks.
Our next question comes from Chris York with JMP Securities. Your line is open.
Good morning, guys and thanks for taking my questions. This one maybe for N. So other income was a record this quarter can you break down some of the drivers there whether that was led by higher restructuring or syndication fees.
Yes, so we actually didnt have any syndication fees in the quarter, Chris and I'll, just give you a little bit of context.
If you look at our cooling activity, but the so.
Accelerated, though I'd from prepayments, which they woke up much of this this quarter and obviously, we didn't have that many prepayments in general if you look at that flow syndication fees, which were with zero and then now other income collectively those items were 14 cents per share for the quarter if I look.
Good work those items collectively have been over the last.
Pool is the average has also been 14 cents per share.
So in aggregate, where we basically.
The same as what we've experienced historically in the other income item. This this particular quarter. It was really driven by an amendment.
Think was was known to the market with.
They're all gas.
And then we had a couple of other items that were.
We're calling them we're pleased because they involve some some sort of an input on alcohol.
The drove that other income line.
Very helpful. I noticed that you did put in the K that.
It wasn't amendment fee. So how much was that amendment t., specifically in the fourth quarter.
Look I can.
Barrels a publicly traded company you know I know I know one.
On one.
I don't want to get into detailed.
I think the total other income.
And dollar wise $7 million $7 million, it's fair or will the I want to a it would be malysz piece of that so.
But you know people to look at the fair Okay.
Or the their public reporting on what did flow.
Got it Okay and then in your prepared remarks, you said that some of your decision to issue a special dividend. This year was driven by expected gains I think and maybe the first half of this year does that include feral cats or curriculum.
Or what are the specific drivers there you hear me, let's take it if we take a step back.
And I mean turned up a little games and not the greatest with tax person, but I do kind of play play one everyone's while we had about $1.50 per share and undistributed income and the we barely made.
By way this is all manageable, but our tax year ends in March.
And we were basically only had about $1.8 million or $2 million a room.
Again, the minimum distribution requirement 90 cents, 90% and so for now.
And now again that could have been that's all solvable and would have been ball, but if you. If you look forward you look for that where our base Devon is and where.
Our kind of recurring.
But I wouldn't call vessels elemental supplemental dividends are through the year you effectively on an accrual basis in Q1.
We would have been out of complying with the minimum distribution requirements now we have to March 20 to salt with the more 21 call that but on accrual based that we would no longer be in and that's a function of.
Both net investment income and cap gain and so that played a big big part of it which is we knew we were going to happen made a large special dividend by March 2021, we he was no. We're running the effect of accrual basis, we would have been out of compliance in Q1.
We barely made it in Q4.
For the tax year.
So that's one piece and the second piece of it is is that the excise tax.
We're continuing to grow and continuing the burden shareholder return.
And.
We're just a pure friction costs and so we were able to minimize we basically we are reducing that by a third on a on a pro forma basis and that will grow getting quite frankly, but we'll reducing that by third.
So and then the therapies there was that there there is there's capital efficiency and that we're saving where effectively reducing our equity and that has a associate cob cost of capital and borrowing which have a opposed chicago half the capital.
For a lot flat and so when you when you put all those three things together, which is.
We knew we were gonna have to be in compliance on a risk basis than 2021, we knew we weren't going to being compliant.
And 2021 that the that the that there. This is actually on a net income basis accredo, because you're saving the excise tax you're saving a little bit of management fee. Given that you go into that you go into that break.
Which is we reduced by intrinsic van and we did buy a little bit of incentive fee, but it's positive about a penny a share on a net income basis, given the excise tax and you're generating higher or are we it seemed like although not consistent.
With.
The path actions, the fact that that facts and circumstances that change.
Like a color is extremely helpful. Ingests you played the role well as a Rick expert.
And if we say hearing wasn't the only thing I would add Chris and we read your report that kind of at low no. I can you referenced the growth in undistributed income year over year, and I think that was actually pretty pretty good as a way to think about one of the inputs into how we size the special dividends. So this time last year.
Maybe did income we estimate of the adult dollar 22.
For the year, we're now at $1.60. So those 38 cents of growth.
Over that period, so that was one of the inputs into how we size the Josh reference the potential to say excise tax.
Which was important to us because the permit loss to the system and then we're also very focused on on preserving and Avi and so the other way we bought about sizing, especially as we looked at the year on the growth that we had achieved through operating result in 2019, we backed off the impact of the of the swap.
The tailwind would that we got from bottom up at movements in the swaps that that's sort of triangulated to have a 50 cents special dividends, but that's what we're thinking behind it as we had discussions over.
Sure makes a lot of since I was just trying to.
When I was looking at undistributed income growth the comments yet in the prepared remarks were just when I was focused on so.
I'll switch gears. The last one was on your potential separation agreement. So I think investors a generally thought the BDC and then T.S.S.P. had received some halo benefits from its association with TPG. So given the recent change at the advisor with TPG why would it be wrong for him.
Investors to think either they informational advantages or maybe even the future capital raising without pease, who seem to be consolidating relationships could be impacted going forward.
Yes look I mean, I think there was a halo benefit if you look back nine years ago today that yet that the platform and $33 billion they use them.
These conversation we had to do we had conversation obviously with our private LP.
They've known about the change relationship over the last nine years, we started the business or 10 people. There is 250 people. We've built out industry expertise. We haven't relied on you know that from or any informational advantage is for years.
So I know I again, I think it businesses business as usual that that cap you know how long would say that nothing Don.
But it wasn't the Pratt and surely that.
Our revolver lenders.
The mill, Don hope to be an impressive the revolving rendered didn't care our cost of capital than change we did at a tap on the bond deal our cost of capital then change quite frankly went down.
And so it is in its been very well known in both the LP Mark and I think with our shareholders. This has really been a JV controlled by the TFP plastic surgery partners.
And and managed.
No we've never done our investment committee nobody's ever referred deal too.
In the BDC and so it is really just business as usual.
Oh, Yeah, it's a good answer and obviously your comments on the debt capital mitigate our concerns there. So so did perspective last one just following up on that so I know the fee was very nominal but what you know and the separation agreement is pending right now but will there be he says.
Mentioned in the licensing fee to TPG for the use of your name would that expire.
Yeah. So there is a little again there there is no there hasn't been any actual fee related to that TPG specialty lending so there.
And and.
Either the meet the management company paid or the or the the shows the pit obviously.
On a go forward basis.
I think to be determined.
But quite frankly is really sixthree part of branded business six we partnered managed business.
And again, there hasn't been a there hasn't been a deal.
We haven't come to a deal about what that looks like.
Got it that's it for me thanks, guys.
Right.
Thank you. Our next question comes from Kenneth Lee with RBC Capital. Your line is open.
Hi, Thanks for taking my question.
Wondering if you could talk about the key factors driving beam Oh, you mentioned an increase in potential earnings power better supporting the increase in it in the base quarterly dividends this year and how much of that it would be dependent on any movement within the LIBOR rates. Thanks.
Yes. Good question, so football, let's take a step back that I don't think the increasing the dividend from 39 to 41, then is more of a resetting what the dividend should have been years back I think on a last year and supplemental dividends we paid out.
19 cents and so you know there was in by the way we grew NAV, even though we pay down 19 cents, though if you divide the simple math 19 by for you know that what for.
4.74, 0.6 ended the quarter out of 39, and so the that the business last year, which would the slightly a little bit of a higher LIBOR environment would have supported with though growing now a basically a dividend around 44 to 45.
<unk> per share with still over earning limit with growing NAV.
So I you know is more a function of that dividend was under size for years and years and years.
And then there was a change in the asset coverage ratio, which would allow for greater financial leverage, which obviously boosted or are we.
And so the combination of those two thing when we look at the we look at our our ability to earn the dividend or even our ability to earn the dividend with coverage. We're just how we think about it we think the dividend of the cash liability. We don't look at spot LIBOR today, we look at the forward LIBOR curve.
That will be a headwind, but the ernie.
As a business.
We've already massively over earning the dividend and so even if you walk for a year or two years out and look at the bought live work are you still feel very good about the newly size dividend.
For the existing power the business.
Gotcha. Okay. That's very helpful. Just one follow up if I mean, you mentioned a within your prepared remarks are seeing a slight uplift in asset yields on new investments wondering if you could just elaborate what's driving baby uplift in yields despite the the movement in LIBOR rates in the quarter. Thanks.
Yes, I look I think it's pretty idiosyncratic quarter to quarter thing bump around so I would say or the overall trend of the industry continues to remain super competitive I mean, I think yields on new investments were 12.3 in Q4 that a large function of that would forever 21 in Q3.
We will.
10 for in Q2 with 11 for in Q1 will.
10, seven and so I I again, I think the idiosyncratic the industry continues to be very very competitive.
But my hope is that that the industry is going to start trying to take spread back as collateral fall and realize that they need to provide a acceptable return given where within the cost structure the shareholders.
I understand very helpful. Thank you.
Thank you. Our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys, good morning, and Ed for up to it exactly the point you just made just in terms of of the industry or the hope maybe the industry will try and takes thread back.
For lack of a better Tim is is it you intend to kind of put a stake in the ground on spread on you all throughout because here right now it looks like the industry really isn't doing that.
Well what comes down like spreads that really seem to be widening and that the broader markets as still tightening so I mean any color.
You can give us <unk> on your your willingness to hold that ground if everybody else loses that mines advantage. You. If you will yeah, we're going to be willing to give an ROE for the manager and for the platform to protect shareholder economics and the are you.
Again at half the award for shareholders and have to work for private LP.
Though watch out is that I think people or ignoring the forward LIBOR curve or is there either their ignoring it or they're making a bet against the forward LIBOR curve. The in overall the industry, earning power if they don't take back Brad.
Going to go down absent massive changes of leverage given the forward LIBOR.
That compounded with a lot of people fix their funding hot and so that's going to compound the issue and though.
You can't manage the business here in the moment you got to you got to manage the business and look at your cost of capital.
And look at shareholders expectations and what the market is telling you about interest rate and your cost of funding and quite frankly, we're we're we're positioned much better because we have no LIBOR, we have LIBOR floor and and.
And loading rate.
Level, corlanor assets and loading reliability and so at some point if you continue the LIBOR dropped below our floors will have.
Net interest margin expansion, but I think the though the though the watch out for the industry is you know people people better people should start thinking about that forward LIBOR and thinking about what that means for their economic reality and overlay that into.
What what their funding mix looks like.
Got to appreciate that just one more if I can sort of that only a be outside oversea, you've got a a ton of expense the a b L Pic and more to publish thing going on a while you've gotten quite returns out of that one of the new web areas of softness if you what I think is in a grocery food retail things like that way.
I think people thought grocery stores with more defensive and again some of the pick a motor retail trends and that's not working out can you give us any color your appetite to do those kinda deals given a a perishable versus non perishable collateral if that changes the dynamics, so if you'd be.
I'm willing to look at those kinda deals, yes, so look at it you're exactly right.
They it's very good when we did great American.
And Pacific T. company back in 2014, which was a growth we sort of deal.
And there are no tackling consideration.
Typically done impact gross you, but there are a pack lean consideration.
There are.
So the perishable and so you have to be.
Much more conservative and be more much more constructive in the borrowing base and your blinded and how that were right now we have to save a lot.
But that has some that some of those similar dynamics, but you know it well I think people don't realize about.
The grocery.
Segment was it was much levered to inflation and given the large fixed cost structure, and though I think people crude portion of basic without inflation would come in and when you have a fixed cost structure. That's good.
You've had deflation and you've had a lot of disrupt the competition.
And so there'll be some opportunity, but I think we'll be very careful.
Appreciate it thank you.
Thank you. Our next question comes from Ryan Lynch with KBW. Your line is open.
Hey, good morning, Thanks for taking my questions just have a couple of remaining.
As part of at least for my understanding is part of.
The partnership and be between TPG and 63.
From I understand you guys are not able each party's you're not able to start competing because there's a overlapping strategies for one year, but then after that you're free to do such just curious has six street thought about once that at one year come off period.
Lapses that you guys will go to pursue other shredding strategies besides credit.
Yeah, I think frankly.
And there's been no agreement reached and so I.
I know, there's this up reported out there I think it's a little bit premature.
You're contracting probably roughly right I don't think this decision was driven by the desire to for either party expand.
Into white space that belong to the other party and so I think this decision if it does come to fruition ones just about the natural evolution.
And that people, who had their own relationships with Lps and people were managing their own separate businesses and they are what there wasn't synergies.
That existed in new on any given the evolution of both businesses. So I.
I think your contract is roughly right.
Although no agreement have been reach.
I would also say that that wasn't the primary factor of you know this process.
Okay makes sense.
And then I wanted to follow up on on your response to Chris' question regarding the dividend.
And the special dividend payment.
Thank you mentioned three reasons one of the reasons, we're you know for paying a special dividend.
Have you guys were potentially get a bump up you know just somebody speech Rick power requirements for 2021.
You also mentioned that you don't laws paying special dividends so.
Curious is you guys still cats.
Supplemental dividend policy at a 50% payout ratio. It feels like you guys could run into the same issue you know again, a year or two from now as you guys have put up really strong results. So is there any consideration to increase seemed a supplemental payout ratio to something higher like 75% or 100% to avoid.
These special dividends, which you guys said you don't really wants pain.
Yeah, We Umer board meeting by the way.
Non-GAAP, Jay and I'm, what would you I mean, yes, you hit it on the on the had which was.
When we do have a Rick problem.
Even if we had to running the supplemental at 75% we're at 100% quite frankly, because the how the that's not how the supplemental with calculate was based on Eni and then a pickup realized cap gains and though we were going to have the rec issue no matter what any questions on an accrual.
Basis, Although you had top 2021 that fall that you were going to have it effectively in in Q1 this year.
So.
We didn't think about the other levers.
Increasing it to 75%.
On the table quite frankly, if the business continues to perform well have the tissue again.
The excise tax killed me because it's pure friction.
And so those things will continue to be on the table.
As as we go forward, but quite frankly, it was a combination of the size of the special not if you could do if you if you needed to the special the percentage of the supplemental and the base dividend and what we did was we hit two of the three.
We went to continue to build NAV and so we didn't we didn't change.
The percentage, but we we hit to the two of the three levers.
Okay that makes sense.
Those are all my questions I appreciate the time today, and a really nice quarter guys.
Great. Thanks, Ryan.
Thank you I'm currently showing no further questions at this time I turn the call back over to Josh easterly for closing remarks.
Great well, thank you very much.
People continued interest.
The funny thing about the coupon call given.
The additional time, we had to get our 10-K, we will be talking to you soon.
For Q1.
Grateful for you to reach out.
If people are your question.
And please enjoy the screen holidays.
With your family and again principal free which held in question.
Thanks, Phil.
Ladies and gentlemen. This concludes today's conference call. Thank you often see you may now disconnect.
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